capturing value - smart prosperity institute · 2016-10-17 · capturing value capturing value, the...

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12 MAINSTREAMING THE ECONOMICS OF NATURE Some aspects of ecosystem functioning such as eco- logical resilience or the proximity of tipping points are difficult to capture in valuations. In such cases this information should rather be presented alongside the valuation calculation. The adoption of safe mini- mum standards or precautionary approaches for decisions about critical natural capital is called for prior to any consideration of trade-offs. [F2, 5, N7, L2] CAPTURING VALUE Capturing value, the final tier of the economic ap- proach, involves the introduction of mechanisms that incorporate the values of ecosystems into decision making, through incentives and price signals. This can include payments for ecosystem services, refor- ming environmentally harmful subsidies, introducing tax breaks for conservation, or creating new markets for sustainably produced goods and ecosystem ser- vices [N2,5-7; L8-9]. It needs to come along with rein- forcing rights over natural resources and liability for environmental damage, In many cases, explicit valuation of the ecosystem ser- vices targeted by such mechanisms can help to en- sure they are economically efficient. However, calculating prices for natural assets and ecosystem services is not always necessary in order to set up market-based schemes. Moreover, such valuation does not imply that all ecosystem services must necessarily be privatized and traded in the market: that is a separate choice that involves a range of issues including equity for the users of common resources and future generations, as well as conside- rations of economic efficiency. The TEEB reports pro- vide numerous examples that illustrate the use of market-based mechanisms for biodiversity conserva- tion, which may be appropriate in certain circumstan- ces. The challenge for decision makers is to assess when market-based solutions to biodiversity loss are likely to be culturally acceptable, as well as effective, efficient and equitable. [N5, 7,; L8] In summary, TEEB’s approach to valuing ecosys- tems and biodiversity is one that acknowledges the limits, risks and complexities involved, covers diffe- rent types of value appreciation, and includes various categories of response at the level of public policies, voluntary mechanisms and markets. In situations where cultural consensus on the value of ecosystem services is strong and the science is clear, it may be relatively straightforward to demonstrate values in monetary terms and capture them in markets. This applies most obviously to commodity values such as the number of livestock or cubic meters of timber, but can equally be applied to amount of carbon storage or the supply of clean water. On the other hand, in more complex situations involving multiple ecosys- tems and services, and/or plurality of ethical or cultural convictions, monetary valuations may be less reliable or unsuitable. In such cases, simple recognition of value may be more appropriate. In general, however, one should not shy away from providing the best available estimates of value for a given context and purpose and seeking ways to internalize that value in decision making. Indeed, the TEEB study calls for assessing and internalizing such values wherever and whenever it is practical and appropriate to do so. A failure to do so is unaccep- table: namely, to permit the continued absence of value to seep further into human consciousness and behaviour, as an effective ‘zero’ price, thus conti- nuing the distortions that drive false trade-offs and the self-destructiveness that has traditionally marked our relationship with nature (for a detailed review of the economics of ecosystem valuation F5, N4, L3). Valuation can act as a powerful form of feedback, a tool for self-reflection, which helps us rethink our relation to the natural environment and alerts us to the consequences of our choices and behaviour on distant places and people. It also acknowledges the costs of conservation and can promote more equi- table, effective and efficient conservation practices.

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Page 1: CAPTURING VALUE - Smart Prosperity Institute · 2016-10-17 · CAPTURING VALUE Capturing value, the final tier of the ... PUTTING THE TIERED APPROACH 3 INTO PRACTICE For every decision

12 MA INSTREAM ING THE ECONOMICS OF NATURE

Some aspects of ecosystem functioning such as eco-logical →resilience or the proximity of tipping pointsare difficult to capture in valuations. In such casesthis information should rather be presented alongsidethe valuation calculation. The adoption of safe mini-mum standards or precautionary approaches for decisions about →critical natural capital is called forprior to any consideration of trade-offs. [F2, 5, N7, L2]

CAPTURING VALUE

Capturing value, the final tier of the economic ap-proach, involves the introduction of mechanisms thatincorporate the values of ecosystems into decisionmaking, through incentives and price signals. Thiscan include payments for ecosystem services, refor-ming environmentally harmful subsidies, introducingtax breaks for conservation, or creating new marketsfor sustainably produced goods and ecosystem ser-vices [N2,5-7; L8-9]. It needs to come along with rein-forcing rights over natural resources and liability forenvironmental damage,

In many cases, explicit valuation of the ecosystem ser-vices targeted by such mechanisms can help to en-sure they are economically efficient. However,calculating prices for natural assets and ecosystemservices is not always necessary in order to set upmarket-based schemes. Moreover, such valuationdoes not imply that all ecosystem services mustnecessarily be privatized and traded in the market:that is a separate choice that involves a range of issues including equity for the users of common resources and future generations, as well as conside-rations of economic efficiency. The TEEB reports pro-vide numerous examples that illustrate the use ofmarket-based mechanisms for biodiversity conserva-tion, which may be appropriate in certain circumstan-ces. The challenge for decision makers is to assesswhen market-based solutions to biodiversity lossare likely to be culturally acceptable, as well as effective, efficient and equitable. [N5, 7,; L8]

In summary, TEEB’s approach to valuing ecosys-tems and biodiversity is one that acknowledges thelimits, risks and complexities involved, covers diffe-rent types of value appreciation, and includes variouscategories of response at the level of public policies,voluntary mechanisms and markets. In situationswhere cultural consensus on the value of ecosystemservices is strong and the science is clear, it may berelatively straightforward to demonstrate values in monetary terms and capture them in markets. This applies most obviously to commodity values such asthe number of livestock or cubic meters of timber, butcan equally be applied to amount of carbon storageor the supply of clean water. On the other hand, inmore complex situations involving multiple ecosys-tems and services, and/or plurality of ethical or culturalconvictions, monetary valuations may be less reliableor unsuitable. In such cases, simple recognition ofvalue may be more appropriate.

In general, however, one should not shy away fromproviding the best available estimates of value fora given context and purpose and seeking ways to internalize that value in decision making. Indeed, theTEEB study calls for assessing and internalizing suchvalues wherever and whenever it is practical and appropriate to do so. A failure to do so is unaccep-table: namely, to permit the continued absence ofvalue to seep further into human consciousness andbehaviour, as an effective ‘zero’ price, thus conti-nuing the distortions that drive false →trade-offs andthe self-destructiveness that has traditionally markedour relationship with nature (for a detailed review of theeconomics of ecosystem valuation F5, N4, L3).

Valuation can act as a powerful form of feedback, a tool for self-reflection, which helps us rethink our relation to the natural environment and alerts us to theconsequences of our choices and behaviour on distant places and people. It also acknowledges the costs of conservation and can promote more equi-table, effective and efficient conservation practices.

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MA INSTREAM ING THE ECONOMICS OF NATURE 13

PUTTING THE TIERED APPROACH INTO PRACTICE3

For every decision the context is different; hence thereis no single valuation process that can be prescri-bed for every situation. However, a broad frame-work or heuristic has emerged that may be useful as a first step towards a recalibrated economic com-pass. This approach can be adapted to fit individualneeds and circumstances, using the three stepsbelow as guideline. As suggested in the previoussection, steps 2 and 3 will not be appropriate in allcontexts.

Step 1: For each decision IDENTIFY and ASSESSthe full range of →ecosystem services affectedand the implications for different groups in society.Consider, and take steps to involve, the full range ofstakeholders influencing and/or benefiting from the af-fected ecosystem services and biodiversity.

Step 2: ESTIMATE and DEMONSTRATE the valueof ecosystem services, using appropriate methods.Analyze the linkages over scale and time that affectwhen and where the costs and benefits of particularuses of biodiversity and ecosystems are realized (e.g.local to global, current use versus future →resilience,‘upstream to downstream’, urban to rural), to helpframe the distributive impacts of decisions.

Box 2: The challenge of application and the ‘TEEBcase’ collection: showcasing best practice examples from around the globe

As outlined in section 1 of this document, →economic valuation of ecosystem services is a challenging taskwhich needs careful selection and application of methodologies, depending on the context and the needs ofa given situation [F4, F5]. High levels of precision and reliability can be obtained using best practices andrigorous methods but this is often time and resource intensive.

The review of case studies undertaken by TEEB shows that, in many instances, more efficient but less precisemethods have been used, hence the results must be interpreted with appropriate care. Nevertheless, evenapproximate estimates of the value of ecosystem services can help lead to better resource management andpolicy, especially where the alternative assumption is that nature has zero (or infinite) value.

The TEEBcase collection presents such examples and discusses the impact they have had in local and regionalpolicy and resource management. The TEEBcases can be accessed via teebweb.org.

Step 3: CAPTURE the value of ecosystem servicesand seek SOLUTIONS to overcome their underva-luation, using economically informed policy instru-ments. Tools may include changes in subsidies andfiscal incentives, charging for access and use, pay-ments for ecosystem services, targeting biodiversityin poverty reduction and climate adaptation/mitigationstrategies, creation and strengthening of propertyrights and liability, voluntary eco-labelling and certifi-cation. The choice of tools will depend on context andtake into account the costs of implementation.

Practical guidance and illustrations of these steps areprovided in the reports (see insert), and are supportedby a collection of case studies from the local and regional level (so-called ‘TEEBcases’, see Box 2), whichare available online. The reader is encouraged to navigate through these resources to find aspects of theapproach most relevant to her or his needs and interests– and indeed, to develop and share additional case studies and advice.

Here, the approach is illustrated by applying it to an eco-system (forests), a unit of human settlement (cities) and abusiness sector (mining). In each case, the steps of recog-nizing, demonstrating and capturing value are illustrated.

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14 MA INSTREAM ING THE ECONOMICS OF NATURE

The value provided to human societies by ecosys-tems varies greatly between (and within) the various

→biomes found on earth. Increasingly, the servicesprovided by terrestrial, freshwater and marine ecosys-tems in various contexts are being assessed, andtheir role in supporting a wide range of economic activity is being appreciated.

For example, Hawaii’s coral reef ecosystems pro-vide many goods and services to coastal populations,such as fisheries and tourism, and also form a naturalprotection against wave erosion. In addition, they represent a unique natural ecosystem. The net benefitsof the State’s 166,000 hectares of reefs off the MainHawaiian Islands are estimated at US$ 360 million peryear (Cesar and van Beukering 2004). The study thushighlights that coral reefs, if properly managed, contri-bute enormously to the welfare of Hawaii through a variety of quantifiable benefits. It covers only valuescurrently captured including recreation, amenity (realestate), research and fishery, the public benefits referring to protection against natural hazards, climateregulation or potential future benefits from species living in the reef are not included (TEEBcase: Recrea-tional value of coral reefs, Hawaii). The threats to coralreefs due to climate change and ocean acidification,as well as local pressures such as pollution and over-fishing, therefore have major economic implications.When considering non-marginal values or the value of a →biome as a whole, monetary values are less mea-ningful and other indicators may be more revealing,such as the fact that half a billion people depend oncoral reefs for their livelihoods [N Summary, C].

Wetlands, too, both inland freshwater and coastal, arebeing ‘re-valued’ as providers of essential ecosystemservices and not simply areas that require draining orconversion to make them economically viable. Floodedwetlands can also be highly effective in reducing pollution (Jeng and Hong 2005); e.g. in India, the EastKolkata wetlands facilitate bio-chemical processes forthe natural treatment of an important share of the city’swaste water – after this treatment process, the remai-ning nutrients in the water are an important input forlocal fish farms and vegetable cultivation (Raychaudhuriet al. 2008). The value of conserving wetlands for floodprotection in the city of Vientiane (Lao PDR) has been

estimated at just under US$ 5 million, based on thevalue of flood damages avoided (TEEBcase: Wetlandsreduce damages to infrastructure, LAO PDR). Wetland protection in Hail Haor, Bangladesh, contributed to anincrease in fish catch of over 80% (TEEBcase: Wetlandprotection and restoration increase yields, Bangla-desh).

The ‘TEEB approach’ can be applied to any ecosys-tem in any biome, from drylands, grasslands and savannas to tundras, mountain ecosystems and island habitats. However, some of the most advancedeconomic evaluation efforts have been carried out for the world’s forests, which are the focus of the re-mainder of this section.

FORESTS: IDENTIFYING ISSUESAND ASSESSING SERVICES

Forests currently occupy about one-third of theEarth’s land surface and are estimated to containmore than half of all terrestrial species, mainly in thetropics. Moreover, forest ecosystems account for overtwo-thirds of net primary production on land – i.e. theconversion of solar energy into biomass through pho-tosynthesis – making them a key component of theglobal carbon cycle and climate (MA 2005).

The UN Food and Agriculture Organisation (FAO) re-ports that net deforestation slowed in recent yearsfrom around 83,000 square kilometres per year, in the1990s, to just over 50,000 square kilometres per yearbetween 2000 and 2010. This is mainly attributed toreplanting of forests in temperate regions, especiallyin China, and to natural re-growth. Tropical deforesta-tion, while slowing in several countries, neverthelesscontinues at a high rate. The first decade of the millennium saw the global extent of primary or naturalforest reduced by over 400,000 square kilometres, anarea larger than Japan (FAO 2010; GBO3 2010).

The issue of tropical deforestation illustrates vividly theeconomics of biodiversity loss. By far the greatest useof deforested land is for agriculture, a sector that generates substantial income which shows up clearlyin national accounts and trade balances. By contrast,the multiple flows of value generated by standing

3.1 APPLYING THE APPROACH: ECOSYSTEMS

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MA INSTREAM ING THE ECONOMICS OF NATURE 15

forests tend to be in the form of →public goods thatin the past have not been valued in monetaryterms or priced in markets. Techniques for calculatingand capturing a wider range of forest values are however increasingly employed, as described below.

An important finding of many studies reviewed byTEEB is the contribution of forests and other eco-systems to the livelihoods of poor rural house-holds, and therefore the significant potential forconservation efforts to contribute to poverty reduction.For example, it has been estimated that ecosystemservices and other non-marketed goods account forbetween 47% and 89% of the so-called ‘GDP of thepoor’ (i.e. the effective GDP or total source of liveli-hood of rural and forest-dwelling poor households),whereas in national GDP agriculture, forestry and fisheries account for only 6% to 17% (Figure 2). [N3]

FORESTS: DEMONSTRATING VALUES

Table 1 below summarizes studies that estimate thevalue of ecosystem services provided by tropicalforests. Values vary according to the methods used, thesize and type of forests considered, the local ecologicalconditions as well as social and economic variables,such as population density or food prices. For example,one study estimated the pollination service provided bypatches of forest adjacent to coffee plantations in CostaRica to be worth US$ 395 per hectare per year, orabout 7% of the farm income (Ricketts et al. 2004), farmore than the average value attributed to forests for the

same service in Indonesia, as shown in Table 1.

A large portion of the value of tropical forests arises from so-called regulating services, such ascarbon storage, erosion prevention, pollution control,and water purification. In many valuation studies, theseregulating services account for around two-thirds of

→total economic value. In contrast, the supply of food,timber, genetic and other materials typically accountsfor a relatively small share of forest value, although theseare the benefits on which perceptions of the economicimportance of forests are often based.

TEEB reviewed research into the benefits and costs ofdesignating forests as protected areas [N8]. The precisevalues vary depending on local conditions and context.These studies, however, suggest that the benefits ofprotecting tropical forest ecosystems often out-weigh the costs. While forest conservation may be agood deal for society, the question remains how to makeit a good deal for the people who actually live there [N8, L7].

FORESTS: CAPTURING VALUES AND FINDING SOLUTIONS

Forests have been the focus of recent efforts to correct the failure of markets to value biodiversity andecosystems, using payments for ecosystem services(PES) [N5, L8]. While still relatively rare and involving modest sums compared with commercialuses of forests and alternative uses of forest lands, PES

Figure 2: ‘GDP of the poor’: estimates for ecosystem service dependence

Source: TEEB for National Policy, Chapter 3 [N3]

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16 MA INSTREAM ING THE ECONOMICS OF NATURE

schemes are nevertheless growing in number andscale. The basic idea is that landowners or communitiesshould be rewarded for practices that keep forests in-tact and maintain their services. This can be accom-plished by using money and other incentives providedby the users of those services, be it society as a whole,through general taxation, downstream water users,through water tariffs, or distant emitters of greenhousegases, through the carbon market or grants based onthe role of forests in climate mitigation.

One country that has established a forest PESscheme at a national scale is Mexico (TEEBcase: Hy-drological Services, Mexico). Since 2003, following achange in federal law to allow a portion of water char-ges to be earmarked for conservation, landowners mayapply for public payments in exchange for commit-ments to preserve forest land and forgo certain uses,such as agriculture and cattle raising. The scheme fo-cuses on areas that are important for the recharge ofMexico’s aquifers, maintaining surface water quality,

and reducing the frequency and scale of damage fromflooding. A points system is used to prioritise areas according to the value of environmental service, as wellas the level of poverty and risk of deforestation (Muñoz-Piña et al. 2008).

During the first seven years of its operation, Mexico’sPES scheme enrolled more than 3,000 forest owners(collectives and individuals), covering an area of 2,365square kilometres and involving payments of over US$300 million. The scheme is estimated to have reduceddeforestation by some 1,800 square kilo-metres, i.e.more than halved the annual rate of deforestation from1.6% to 0.6%. It has effectively contributed to protectingwater catchments and biodiverse cloud forests, in addition to cutting emissions of about 3.2 million tonnesof carbon dioxide equivalent (Muñoz et al. 2010).Another approach to capture the value of forest eco-systems is to require compensation from landownerswho convert forests to other uses, based on the valueof the services lost. In 2006, the Indian Supreme Court

Table 1: Some estimated values of ecosystem services from tropical forests

Ecosystem Service

Food, fibre and fuel

Climate regulation

Water regulation

Groundwater recharge

Pollination

→Existence values

Value

Lescuyer (2007) values the provisioning services of Cameroon’s forests at US$ 560 for timber, US$ 61 for fuelwood, and US$ 41-70 for non-timber forest products (all values per hectare per year).

Lescuyer (2007) values climate regulation by tropical forests in Cameroon at US$ 842-2265 per hectare per year.

Yaron (2001) values flood protection by tropical forests in Cameroon at US$ 24 per hectare per year. Van Beukering et al. (2003) estimate the NPV ofwater supply from the Leuser Ecosystem (comprising approximately 25,000 km2

of tropical forest) at US$ 2,42 billion.

Kaiser and Roumasset (2002) value the indirect watershed benefits of the40,000 hectare Ko’olau watershed, in Hawaii, at US$ 1.42-2.63 billion.

Priess et al. (2007) value pollination services provided by forests in Sulawesi, Indonesia, at 46 Euros per hectare. Ongoing forest conversion is expected to reduce pollination services and thus coffee yields by up to 18% and net revenues per hectare by up to 14% over the next two decades.

Horton et al. (2003) use contingent valuation to estimate the →willingness to payof UK and Italian households for protected areas in the Brazilian Amazon at US$ 46 per hectare per year. Mallawaarachchi et al. (2001) use choice modellingto value natural forests in the Herbert river District of North Queensland at AU$ 18 per hectare per year.

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MA INSTREAM ING THE ECONOMICS OF NATURE 17

drew up a scale of compensatory payments for con-verting different types of forested land to other uses.Their regulations drew from a report led by the Institutefor Economic Growth and estimates made by Green Indian States Trust (GIST 2005). The amounts of com-pensatory payments are distinguished for six classes offorest types, and based on estimated values for timber,fuel wood, non-timber forest products, ecotourism, bio-prospecting, flood prevention and soil erosion, carbonsequestration, biodiversity values, as well as values attached to conserving charismatic species such as theRoyal Bengal Tiger and Asian Lion. Payments for thepermits to convert forest lands go into a public fund toimprove India’s forest cover (CEC 2007). In 2009, the Supreme Court directed Rs. 10 billion (around EUR 220 million) to be released every year for affore-station, wildlife conservation and the creation of ruraljobs (Surpreme Court of India 2009).

A new international payment mechanism under deve-lopment has the potential to significantly scale-up thecapture of certain forest ecosystem values. Initiatives toReduce Emissions from Deforestation and ForestDegradation (REDD-Plus), currently being negotiatedunder the UN Framework Convention on ClimateChange, could, if successful, generate substantial revenues for the conservation and sustainable use offorests. Studies suggest that REDD would compete

favourably with other land uses (Olsen and Bishop2009), while at the same time potentially bringing much-needed income to remote rural communities [C2, N5].

Human-induced deforestation, which accounts for about12 per cent of global greenhouse gas emissions, is anissue that must be addressed as part of the internationalresponse to climate change (van der Werf et al. 2009).Avoiding deforestation is an economically attractive optiondue to the fact that it is among the cheapest ways of reducing emissions, in terms of dollars per tonne of carbon (McKinsey 2009; Eliasch 2009), and also becauseit secures further ecosystem and biodiversity benefits.

There are a number of considerations before a REDD-Plus scheme becomes a working mechanism withreal impacts on forest decisions. For instance, keychoices need to be made on how funds will be allo-cated among landowners and local and national go-vernments; how the rights of local and indigenousgroups will be acknowledged; and whether investorsand/or governments will be able to use the carboncredits generated by REDD-Plus to help meet emis-sion reduction targets or obligations in their owncountries. Before REDD-Plus proceeds beyond thepilot phase, major investments will be needed to buildcapacity in developing countries in order to make the mechanism credible.

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18 MA INSTREAM ING THE ECONOMICS OF NATURE

All forms of human settlement involve a combinationof dependence on the current availability of →naturalcapital, both local and remote, and the impact of thesettlement on the future availability of the natural capital. As noted in the previous section, the poorhouseholds in rural areas are often disproportionatelydependent on biodiversity for their daily needs; agriculture remains the dominant activity for some37% of the world’s labour force, or 1.2 billion people(CIA 2010) [L1]. An assessment of ecosystem services and natural resource management in ruralareas is provided in the TEEB for Local and RegionalPolicymakers report [L5]. This section focuses on whathas become the dominant form of human settlement,urban living, and its economic relationship with nature.

CITIES: IDENTIFYING ISSUES AND ASSESSING SERVICES

For the first time in history, more than half of thehuman population lives in cities. China already has100 cities with a population of over one million andIndia has 35 and by 2050, the UN predicts that up to80% of the global population could be based in urbanareas (UNDESA 2010). Moreover, most of the world’scities are situated on the coasts, making them parti-cularly vulnerable to climate change effects and moredependent on well-functioning coastal ecosystems.

This demographic shift has profound implicationsfor the relationship between our species and the restof nature. The fast-moving, mechanized lifestyle oftoday’s urban centres presents an illusion of distanceand disconnection from the natural world. Yet everyactivity in our towns and cities depends in some wayon the Earth’s ecosystems and their functions, andimposes pressures upon them. The energy for ourtransport, raw materials for our gadgets, food in ourhomes and restaurants, convenient disposal of ourwastes, all depend on biological resources but thispressure and impact on the resources is often econo-mically invisible [L4].

The paradox of city living is that while it appears to bean efficient use of the Earth’s land space (50 per centof the population crammed into two per cent of itsland surface), the ‘ecological space’ required to serve

urban needs is enormous. For example, the ecologicalfootprint of Greater London in 2000 was estimated tobe nearly three hundred times its geographical area,and twice the size of the United Kingdom (Best FootForward 2002).

The impact of cities on the world’s resources is, infact, disproportionate to their share of the popula-tion. Urban activities are estimated to account forsome 67% of total energy consumption, and 70% ofgreenhouse gas emissions (OECD/IEA 2008). Similardominance of the global demand for resources can beobserved in urban consumption of fresh water, woodand other raw materials.

Decision makers in cities have a responsibility to ack-nowledge the natural capital required to maintain andimprove the well-being of their residents. The firststep is one of discovery – an assessment of the relationship between city life and the environment.This assessment can be undertaken at various sca-les: the total footprint of a city, in terms of its use ofresources and production of waste; the role andvalue of regional ecosystems in providing for theneeds of city-dwellers; and the importance of theurban environment itself, including the amount ofgreen space available to each resident, and its influence on quality of life [L4].

Even without formal →economic valuation, the impor-tance of green spaces in urban areas to the qualityof life of their residents has prompted city authorities toprioritize parks and the protection of biodiversity in development plans. For example, the Brazilian city ofCuritiba recognized the importance of extending a network of urban parks to prevent flooding and providerecreation. With parks covering nearly one-fifth of thecity, each citizen of Curitiba has an average of morethan 50 square metres of green space, among the highest ratios in Latin America (ICLEI 2005).

Similarly, Singapore has for decades prided itself inbeing a ‘garden city’, with a model national parks service. Singapore today continues its experiment in‘greening’ with rooftop gardens and well maintained wilderness areas open to the public, including SungeiBuloh (a mangrove park restored from disused shrimp

3.2 APPLYING THE APPROACH: HUMAN SETTLEMENTS

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MA INSTREAM ING THE ECONOMICS OF NATURE 19

farms), Bukit Timah Nature Reserve (a hilly area of primary and secondary tropical rainforest), and McRitchie Reservoir (another natural area which serves asthe catchment for the island city’s main freshwater reservoir).

Singapore has also taken the lead in devising a ‘CityBiodiversity Index’ which could be emulated more wi-dely to help cities benchmark their efforts to enhancequality of life (TEEBcase: Singapore city biodiversityindex). The Singapore index measures performanceand assigns scores based on three categories:1. the number of plant and animal species in a city;2. the services that these plants and animals provide, such as pollination and carbon storage; and

3. how well the city manages its biodiversity – for instance, by setting up a conservation agency or a museum to document species and habitats [L4].

CITIES: DEMONSTRATING VALUES

Demonstrating the value of ecosystem services pro-vided to cities by the surrounding countryside andurban green spaces can help decision makers maximize the efficient use of natural capital. For in-

stance, a study undertaken for the David SuzukiFoundation of Canada sought to value the natural capital contained within the ‘Greenbelt’ of Ontario,Canada, which adjoins the Greater Toronto area, threeyears after its designation as green area (TEEBcase:Economic value of Toronto’s Greenbelt, Canada). Themost valuable services identified by the study werehabitat, flood control, climate regulation, pollination,waste treatment, and control of water runoff. The studyestimated the total value of the region’s measurablenon-market ecosystem services at CA$ 2.6 billion annually (Wilson 2008).

The valuation of the natural capital protected by theGreenbelt can be compared with →opportunity costsassociated with other uses of the land, and thus help in-form future decisions, such as whether to expand theGreenbelt to areas currently outside the protected zone.

In other cases, valuation of the services provided to ci-ties by surrounding ecosystems has been decisive inpreventing the conversion of natural areas to otheruses. For example, the Nakivubo Swamp, linking theUgandan capital Kampala with Lake Victoria, wasfound in 1999 to have a value of between US$ 1 million

Rio de Janeiro, Brazil, a city shaped and defined by its natural landscape

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20 MA INSTREAM ING THE ECONOMICS OF NATURE

and US$ 1.75 million per year (depending on the valuation technique used) for the services it providedin purifying the city’s waste waters and retainingnutrients (TEEBcase: Protected wetland for securingwastewater treatment, Uganda, Emerton 1999) [L4].

Based on this valuation and the importance of the wetland for local livelihoods, plans to drain it fordevelopment were abandoned, and Nakivubo was incorporated into Kampala’s greenbelt zone. Never-theless, the wetland has suffered significant modifica-tion in the past decade, compromising its ability tocontinue performing a water purification function, anda new plan for rehabilitation and restoration of Naki-vubo was proposed in 2008. The Ugandan case em-phasizes that while valuation of ecosystem serviceswill often strengthen arguments for protecting naturalcapital, it will not of itself prevent decisions from beingmade that degrade those services.

CITIES: CAPTURING VALUES AND FINDING SOLUTIONS

In a number of cases around the world, the valuationof ecosystem services has stimulated the implemen-tation of policies that reward those responsible forprotecting the services.

One of the most celebrated examples was the deci-sion by the New York City authorities to pay land-owners in the Catskill mountains to improve farmmanagement techniques and prevent run-off of wasteand nutrients into nearby watercourses in order toavoid building expensive new water treatment facilities, which otherwise would have been requiredby federal regulations [N9].

The cost of this choice, between US$ 1 billion and US$1.5 billion, contrasts with the projected cost of a newwater filtration plant at US$ 6 billion to US$ 8 billion,plus US$ 300 million to US$ 500 million in estimatedannual operating costs. Water bills for New Yorkerswent up by 9%, rather than doubling as they wouldhave if a filtration plant had been built (Perrot-Maitreand Davis 2001; Elliman and Berry 2007).

In other cities, innovative economic instruments arebeing used to capture the value of highly-prized and

increasingly scarce green spaces. An example is the Japanese city of Nagoya, which lost more than16 square kilometres of green space between 1992and 2005, and risks a continuing loss of its remaining Satoyama, Japan’s traditional diverse agriculturallandscape. Under a new system of tradable develop-ment rights implemented from 2010 onwards, devel-opers who wish to exceed existing limits on high-risebuildings will be able to offset their impacts by buyingand conserving Satoyama areas at risk of develop-ment. In addition, incentives are offered to devel-opers in Nagoya to provide more green space withintheir projects, including discounts on bank loans for buildings that receive a higher ‘star rating’ based ona green certification system designed by the city authorities (Hayashi and Nishimiya 2010). Theseschemes are clearly in an early stage of develop-ment, however, there is ample experience with theuse of tradable permits to preserve open space and to contain urban sprawl available, e.g. in the US(Pruetz 2003) [N7]. Other cities will wish to evaluatetheir progress when making decisions about similarinstruments [L4].

Finding appropriate solutions that value and maintainthe natural capital required for the well-being ofurban residents can be greatly helped by a formalprocess of ‘ecological budgeting’. For example, aprocedure known as ecoBudget has been used bythe municipality of Tubigon in the Philippines since2005, as a way of tackling major threats to environ-mental resources and evaluating the impact of existing environmental initiatives. Shadowing the sequence of the financial budget cycle, ecoBudgetmonitors the state of various elements of natural capital judged essential to the economy of the mu-nicipality and the surrounding province: fertile soil,clean water, high biodiversity, adequate forest cover,healthy mangroves, seagrass and coral reefs. Aftera wide consultation process involving members ofthe public and the private sector, a Master Budgetwas drawn up to target particular aspects of naturalcapital felt to be at risk. Among the resulting mea-sures were the planting of timber and fruit trees, thereforestation of mangroves, establishment of a newmarine protected area, and the implementation of an ecological solid waste management programme.[L4]

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Business has much to gain from following the ap-proach promoted by TEEB [B1]. If anyone doubtedthat, events in the Gulf of Mexico in April 2010 shouldhave set off alarm bells in boardrooms all over theworld. Here was an industry with relatively little directdependence on ecosystem services (compared withagri-business, forestry or fisheries, for example) whichnevertheless faced a major threat to its market valueand bottom line as a direct result of the environmentalimpacts of offshore oil drilling. In this case, a majorenergy company was suddenly faced with society’svaluations of marine and coastal ecosystems, and for-ced to internalize the costs of environmental damageresulting from a large oil spill.

At a global scale, the potential ecological liabilitiesof business loom very large. For example, a studyfor the United Nations Principles for Responsible Investment (UNPRI) estimated that 3,000 listed com-panies in the world were responsible for environmental‘externalities’ (i.e. third-party costs, or ‘social costs’, ofnormal business transactions) amounting to over US$2 trillion in Net Present Value terms (based on 2008data), or about 7% of their combined revenues and upto a third of their combined profits [B2]. The externali-ties valued in this study were greenhouse gas emissi-ons (69% of the total), overuse and pollution of water,particulate air emissions, waste and unsustainable useof natural fish and timber (UNPRI forthcoming).

Morenci Mine, largest copper mine in the United States: mining and quarrying may have considerable impact on landscapes.

Cop

yright: TJ Blackwell / W

ikiMedia Com

mons

3.3 APPLYING THE APPROACH: BUSINESS

Businesses increasingly recognize the importanceof biodiversity and ecosystem services for their operations, as well as the business opportunities pro-vided by the conservation and sustainable use of bio-diversity. In a 2009 survey of 1,200 business executivesfrom around the world, 27% of respondents were either‘extremely’ or ‘somewhat’ concerned about biodiversityloss, which was seen as a threat to business growthprospects (PricewaterhouseCoopers 2010). The figurewas significantly higher for CEOs in Latin America (53%)and Africa (45%). More recently, a survey of over 1,500business executives found that a majority of respon-dents (59%) see biodiversity as more of a business opportunity than a risk (McKinsey 2010).

The relationship between business and biodiversityis explored comprehensively in TEEB for Business[B1-7]. Here, we highlight the TEEB approach, for illustration, with respect to the mining and quarryingsector.

MINING: IDENTIFYING ISSUES AND ASSESSING SERVICES

For mining and quarrying, failure to account for the values of natural capital can pose significant businessrisks and result in missed business opportunities.In the estimate of externalities associated with someof the world’s leading companies, mentioned above,

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over US$ 200 billion, or almost 10% of the total, is attributed to the industrial metals and mining sector.(UNPRI forthcoming)

The direct use of ecosystem services for miningand quarrying includes the need for freshwater sup-plies for mineral processing, which can be very signi-ficant. More often, the sector is associated withadverse impacts on biodiversity, due to habitat dis-turbance and conversion. The largest direct impactsresult from surface mining, in which entire habitatsand the geological features underlying them are re-moved during the period of extraction. In addition, thequarrying process can disturb plant and animal (andhuman) communities through noise, dust, pollutionand the removal and storage of waste (tailings). Lessdirect but nonetheless significant impacts can comefrom the wider footprint of mining exploration, suchas access roads that bring people into ecosystemswhere there has previously been little or no humanpresence, or the ’honey pot’ effect of increased eco-nomic activity attracting large numbers of workers,who may engage in other environmentally damagingactivities (e.g. farming to supplement mining wages).Finally, the use and disposal of some heavy metalscan have significant negative impacts on soils, waterresources, animal and human health.

However, the ecological balance sheet of thesector is by no means all negative. The margins ofopen mines and quarries are often kept forested toreduce the visibility and noise of the workings, crea-ting buffer zones where wildlife is protected by defaultor design. Restored mines and quarries can createwildlife habitats such as wetlands, sometimes withgreater biodiversity value than the land use that pre-ceded the mining or quarrying activity. Although insome cases these ecosystem values can be capturedthrough ecosystem markets generating additional revenue to support corporate conservation actions, inmost cases companies treat expenditure for restora-tion as part of the cost of doing business.

Increasingly, opportunities are available to, and taken upby, the mining and quarrying sector to compensate forits ecological costs. The intervention can be direct,through activities to enhance biodiversity in the regionswhere companies operate, and may include biodiversity

offsets or other schemes to mitigate and/or compensatefor unavoidable residual impacts (see below). Many envi-ronmental organizations are also beginning to see a com-mon interest with the mining and quarrying sector, leadingto some unexpected and productive partnerships. Theself-interest of the sector is clear: mining and quarryingrequires a licence to operate from society, both literallythrough planning and permitting processes, and in awider sense through concepts of good corporate citizen-ship. In the long-term this necessitates giving back to so-ciety more than what is being taken in the form of naturalcapital.

On the conservation side, a profitable industry withthe needs and impacts of the mining sector can represent an opportunity to leverage significant fundsand human resources for biodiversity conservation.Even if it does not seem very dependent on ecosys-tem services, the sector has much to lose from thecontinued degradation of natural capital and the economic and social consequences that go with it.

MINING: DEMONSTRATING VALUES

Valuation of ecosystem services has been used bysome mining and quarrying companies to support pro-posals for expanding production and to guide the re-habilitation of sites once production has finished. Forexample, in relation to an application to extend an exis-ting quarry into agricultural land in North Yorkshire, Uni-ted Kingdom, Aggregate Industries UK (a subsidiaryof Holcim) proposed to create a mix of wetlands for

Figure 3: The concept of Net Positive Impact

Source: Rio Tinto 2008

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wildlife habitat as well as a lake for recreational use onceextraction is completed. In this case, an economic ana-lysis using benefits transfer methods helped to value theexpected changes in ecosystem services. The studyconcluded that, over 50 years and using a 3% →dis-count rate, the restored wetland would deliver net be-nefits to the community of some US$ 2 million in presentvalue terms, after deducting the costs of restoration and

→opportunity costs. The benefits were mainly accoun-ted for by biodiversity (US$ 2.6 million), recreation (US$ 663,000) and increased flood storage capacity(US$ 417,000), and far outweighed the current bene-fits provided by agriculture (Olsen and Shannon 2010).

In other cases, biodiversity valuations have providedarguments against mining. In the early 1990s, Austra-lia’s Reserve Assessment Commission (RAC) investiga-ted the options of either opening up the KakaduConservation zone for mining, or combining it with theadjoining Kakadu National Park. To help its deliberation,the commission conducted a contingent valuation studyto estimate the economic value of the expected damageto the site should the mining go ahead. The result, basedon an average →willingness to pay to avoid the da-mage, valued the area at AU$ 435 million, more than fourtimes the net present value of the proposed mine, put atAU$ 102 million.

The Australian government rejected the proposal tomine the conservation area in 1990, although the valuation study was not used as part of the final report ofthe RAC – perhaps because at the time there was uncer-tainty about the validity of non-market valuation methods.Nevertheless, the example demonstrates the potential forintangible values of ecosystem services to be measuredto some degree, and for such techniques to be usedwhen appraising industrial projects. Such an approachcan help firms establish the potential costs of damages,and therefore the risks, associated with their investments.This type of valuation has been used to calculate the level of fines imposed on some polluting companies.

MINING: CAPTURING VALUES AND FINDING SOLUTIONS

As noted above, some damage to ecosystems frommining and quarrying activities is inevitable. In recogni-tion of this, a few companies are exploring concepts

such as ‘No Net Loss’ and ‘Net Positive Impact’, inwhich unavoidable, residual biodiversity impacts areoffset by conservation activities (usually very close tothe impact site), with the aim of being at least equal invalue to damages that cannot be avoided.

One business which has taken up Net Positive Im-pact on biodiversity as a long-term goal is the inter-national mining company Rio Tinto, which announcedthe policy as a voluntary measure in 2004. As can beseen by Figure 3, the first steps in the process are toavoid and minimize negative impacts, and then to rehabilitate areas affected by the company’s activi-ties. Once the adverse impacts are reduced as far aspossible using these steps, offsetting and additionalconservation actions are undertaken as required toachieve a net positive result for biodiversity [B4].

A key step towards achieving Net Positive Impact isthe development of reliable tools to assess and verify the biodiversity impacts of a company’s acti-vities, both positive and negative. In association withseveral conservation organizations, including theEarthwatch Institute and IUCN, Rio Tinto has begunto test Net Positive Impact in Madagascar, Australiaand North America. Other efforts to develop indica-tors and verification processes to assess businessimpacts on, and investments in, biodiversity include theBusiness and Biodiversity Offset Program (BBOP) andthe Green Development Mechanism (GDM) initiative2.

Attempts to rehabilitate damaged sites or offset adverseimpacts on biodiversity and ecosystems are sometimesundertaken by companies on a voluntary basis. In ad-dition, some governments have introduced incentivemechanisms to encourage or require mitigation andcompensation for adverse impacts. In a few cases,new markets for ecosystem services or biodiversity‘credits’ have been established, in which extractivecompanies may be both significant buyers and sellers,due to their role as land managers as well as their re-sponsibility for land disturbance.

Wetland Mitigation Banking in the United States wasone of the first such systems to be established; it has ac-cumulated considerable experience and has been refinedover time. Under this scheme, developers are obliged tocompensate for damage to wetlands, either directly or by

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purchasing credits from third parties, based on the res-toration of wetlands in the same watershed. Although theapproach is still evolving, the market for US wetland cre-dits is currently estimated to be worth between US$ 1.1and 1.8 billion annually (Madsen et al. 2010).

Several Australian states have introduced similar sche-mes, whereby disturbance of native vegetation and im-pacts on species habitats may be compensated by anappropriate offset, generated by active conservation orrestoration projects. Examples include the Biobankingscheme introduced in New South Wales in 2008; andthe Bushbroker scheme in Victoria, which has so far fa-cilitated more than AU$ 4 million in trades [B5, L8].

Approaches such as Net Positive Impact, wetland mitigation and bio-banking can help ensure that developers take responsibility for their environmentalfootprint, while also seeking to maintain natural capital. At the same time, there may be ecological andsocial limitations to applying biodiversity offsets and otherforms of compensatory mitigation, especially where im-pacts are very large, suitable land for offsets is scarce or

3.4 SUMMING UP THE ‘TEEB APPROACH’As illustrated by the examples, the approach summa-rized by TEEB can be applied in a wide variety ofcontexts, with a number of common threads. Usingan economic approach to environmental issues canhelp decision makers to determine the best use ofscarce ecological resources at all levels (global, natio-nal, regional, local, public, community, private) by:

• providing information about benefits (monetary or otherwise, including monetary estimates of non-tangible cultural values) and costs (including

→opportunity costs);• creating a common language for policymakers, business and society that enables the real value of natural capital, and the flows of services it provides, to become visible and be mainstreamed in decision making;

• revealing the opportunities to work with natureby demonstrating where it offers a cost effective means of providing valuable services (e.g. water supply, carbon storage or reduced flood risk);

• emphasizing the urgency of action through de-monstrating where and when the prevention of biodiversity loss is cheaper than restoration or replacement;

• generating information about value for designing policy incentives (to reward the provision of ecosys-tem services and activities beneficial to the environ-ment, to create markets or level the playing field in existing markets, and to ensure that polluters and resource users pay for their environmental impacts).

This synthesis has emphasized the approach whichTEEB hopes to encourage for better management ofnatural capital. It concludes with a summary of theprinciple conclusions and recommendations that haveemerged from the study.

mechanisms for community participation are weak.

Mining enterprises may also benefit from the marketadvantages available for products that can be certi-fied under social and environmental labellingschemes. One example is the Chocó region of Colombia, a biologically and culturally rich area withsoils containing gold and platinum. Fearful of the impact of large-scale mining on fishing, wood ex-traction and subsistence agriculture, local communi-ties chose not to rent out their lands to miningcompanies, but instead introduced their own low-impact practices of mineral extraction that do not involve the use of toxic chemicals. The minerals arecertified under the FAIRMINED label, giving the communities a premium and additional income whilesustaining biodiversity and ecosystem services [L6].At a larger scale, the Responsible Jewellery Councilis working on standards and assurance processes to guarantee the social and environmental perfor-mance in the diamond and gold jewellery supplychain, based on third party audits and certification(Hidron 2009; Alliance for Responsible Mining 2010).